TMI Blog2010 (8) TMI 964X X X X Extracts X X X X X X X X Extracts X X X X ..... ). As the assessee has not claimed any expenditure, the disallowance does not arise. At the same time, the work-in-progress of the assessee has to be recomputed by excluding this expenditure, which the assessee has not claimed. All the Ground is allowed for statistical purposes. - Shri J. Sudhakar Reddy, AM and Shri V. Durga Rao, JM For the Appellant: Shri Yogesh Thar For the Respondent: Shri R.M. Tiwari O R D E R PER J. SUDHAKAR REDDY, AM: This appeal filed by the assessee is directed against the order dated 08.07.2008 of the Commissioner of Income-tax(Appeals)-XIII, Mumbai, for the assessment year 2005-06. 2. Facts in brief :- The assessee is a builder and is engaged in the business of redevelopment of tenanted property. It follows the project completion method of accounting since its inception in the assessment year 1995-96. This method is being consistently followed and the income of project is offered for taxation in the year of completion of the project. The expenses incurred on a project are accumulated under the head construction work-in-progress and in the final year of completion, this is taken as expenditure. 3. The assessee filed it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Accounting Standard (AS)-7 (Revised 2002) is not applicable to builders/developers. 3. The appellant prays that the Project Completion Mehtod be accepted for the purpose of payment of income tax on income by the assessee. 4. Alternatively, assessed income for the year should be in the same proportion as percentage completed this year to total income on completion of the project. II. Expenses disallowed u/s.40(a)(ia). 1. On the facts and circumstances of the case and in law the CIT(A) has erred in confirming a disallowance of the expenses u/s.13,22,989/-. 2. The CIT(A) ought to have and considered that the appellant had not claimed these as expenses in the profit and loss account as it follows project completion method of offering income to tax, which it has so in A.Y.2006-08 as the project was completed in that year. All these expenses have been accumulated under the head construction work-in-progress under current assets hence, question of disallowance does not arise. 3. The CIT(A) has also not considered the amendment in sec.40(a)(ia) interested w.e.f.01.04.2005 granting relief in depositing of TDS. Alternatively, in the event disallowance is uphel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that even as per this Guidance Note read with the Agreement of Sale, executed by the assessee, it is clear that the risks and the rewards of ownership have not been transferred to the buyer and the seller retains effective control of the goods transferred. He took this Bench to para 5, para 11 and para 19, etc. of the Agreement and argued that no legal right to sell or transfer accrued to the assessee. He submitted that the assessee would have a right to sell only if possession is given or at least if the flat is ready. He relied on the decision of the Bangalore Bench B of the Tribunal in the case of Prestige Estate Projects (P) Ltd. V. DCIT(ITA No. 218/Bang/2009 for A.Y. 2005-06) Order dated 11th September 2009 (2010) 33 DTR (Bang.)(Trib.) 514, and submitted that the issue is covered in his favour. He submitted that in the case of real estate developer, the profit accrues only on sale and not otherwise. He pointed out the errors in the computation of income done by the assessee. 10. On the issue of disallowance of section 40(a)(ia), he submitted that the assessee has not sought any allowance of expenditure during this year and, therefore, the question of disallowance does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een rightly rejected by the A.O. The A.O s contention, which is affirmed by the CIT(A) is that AS-7 issued by the Institute of Chartered Accountants of India is applicable to the builders and real estate developers. This finding in our opinion is erroneous. AS-7 prior to its revision in the year 2002 dealt with the Accounting for Construction Contracts, in the financial statements of enterprises. We extract a part of this statement for ready reference: This statement deals with accounting for construction contracts in the financial statements of enterprises undertaking such contracts thereafter referred to as contractors ). The statement also applies to enterprises undertaking construction activities of the type dealt with in this statement not as contractors but on their own account as a venture of a commercial nature where the enterprise has entered into agreements for sale. [Emphasis own] 14. A perusal of the above makes it clear that the statement applied to builder and real estate developers. In AS-7, as revised in the year2002, the scope of the statement is given as follows: Scope (1) This statement should be applied in accounting for construction contracts in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raphs 1 and 2 above. The Committee also notes that the revised Accounting Standard (AS) 7, Construction Contracts , issued by the Institute of Chartered Accounts of India in 2002, does not contain the aforesaid sentence contained in the pre-revised AS-7. On the other hand, paragraph 1 of revised AS-7, clearly states that, This Statement should be applied in accounting for construction contracts in the financial statements of contractors . Therefore, the Committee is of the view that the revised AS 7 is not applicable to such enterprises. [Emphasis own] Thus, the revised AS-7 cannot be applied to enterprises which is in the business of real estate developers. 15. The Bangalore Bench of the Tribunal in the case of Prestige Estate Projects (P) Ltd.(supra) has held as follows: Accounts Accounting system Project completion method consistently followed Assessee developer had been regularly employing project completion method which is an accepted method of accounting Accounting Standard -7 has not been specified by the Central Government under s.145(2) Hence, AO could not reject the accounts under s.145(3) on the ground that the assessee had not followed the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received were much less than the total expenditure/cost incurred by the assessee upto date. In the circumstances so far as the assessment year 1977-78 is concerned we accept the assessee s submission that it would be in order if no profits or losses are estimated from the venture for the assessment year 1977-78. the assessment for this year is, therefore, cancelled even on this score. 18. In this year the assessee has admittedly completed only 53.95% of the construction and hence, it cannot be said that the assessee has substantially completed the project, so as to recognize income under the project completion method of accounting. 19. At para 19, the Hon ble Tribunal in the case of Champion Construction Co. (supra) held as follows: However, the position as regards the assessment year 1978-79 is materially different. The construction of the building is completed in that year. Total area earmarked for sale is 61,396/- sq.ft. out of which upto the end of that year the assessee had sold 49,965 sq. ft. i.e. about 80 per cent of the area. The net receipts have far exceeded the total cost or expenditure to the assessee. Assuming there is any possibility of the assessee s in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been held that in every case of substitution of one method by another method, the burden is on the Department to prove that the method in vogue is not correct and it distorts the profits of a particular year. Under the mercantile system of accounting based on the concept of accrual, the method of accounting followed by the assessee is relevant. In the present case, there is no finding recorded by the AO that the completed contract method distorts the profits of a particular year. Moreover, as held in various judgments, the Chit Scheme is one integrated scheme spread over a period of time, sometimes exceeding 12 months. We have examined computation of tax effect in these cases and we find that the entire exercise is revenue reutral, particularly when the scheme is spread as one integrated scheme spread over a period of time. 20. As stated above, we are concerned with asst. years 1991-1992 to 1997-1998. In the past, the Department had accepted the completed contract method and because of such acceptance, the assessee, in these cases, have followed the same method of accounting, particularly in the context of chit discount. Every assessee is entitled to arrange its affairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be visualized, the method consistently followed can be accepted. 25. In view of the above discussion, we have to necessarily uphold the contention of the assessee and allow ground No. 1 of the assessee. We have allowed this ground of the assessee on the propositions discussed above, we do not give any finding on whether revenue has to be recognized in this year based on the Guidance Note issued by the Institute of Chartered Accountants of India on Recognition of Revenue by Real Estate Developers, by interpreting the Agreement of Sale, etc., as this would be an academic exercise. Accordingly, ground No. I is allowed. 28. Coming to ground No. II, as mutually agreed between the parties, we respectfully follow the order of the Mumbai Bench J of the Tribunal in the case of Savala Associates v. ITO (35 SOT 148), we set aside the matter to the file of the A.O. on the issue of disallowance under section 40(a)(ia) of the Act. As the assessee has not claimed any expenditure, the disallowance does not arise. At the same time, the work-in-progress of the assessee has to be recomputed by excluding this expenditure, which the assessee has not claimed. Ground No. II(1) and (2) is allow ..... 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